Bank Term Funding Program In response to the bank failures of March, the government took extraordinary measures to mitigate fallout across the banking sector. The program was designed to provide liquidity to financial institutions following the collapse of Silicon Valley Bank and other bank failures, and to reduce the risks associated with current unrealized losses in the U.S. banking system that totaled over $600 billion at the time of the program's launch. Funded through the
Deposit Insurance Fund, the program offered loans of up to one year to eligible borrowers who pledged as
collateral certain types of
securities including
U.S. Treasuries,
agency debt, and
mortgage-backed securities. The collateral was valued at
par instead of
open-market value, so a bank could borrow on asset values that have not been impaired by a
series of interest rate hikes since 2022. The Federal Reserve also eased conditions at its
discount window. The
Department of the Treasury said it would make available up to $25billion from its
Exchange Stabilization Fund as a backstop for the program. In January 2024, the Federal Reserve raised the interest rate on new BTFP loans, stating loans outstanding in the program as of January 17 were $161.5 billion. The program ceased offering new loans on March 11, 2024.
Government discussion of other funding In addition to working with their counterparts at the FDIC and U.S. Treasury to provide liquidity to banks through the BTFP, by March 2023, the Federal Reserve had begun to internally discuss implementing stricter
capital reserve and liquidity requirements for banks with between $100 billion and $250 billion in assets on their balance sheets. A review of regulations affecting regional banks had been ongoing since 2022, as Federal Reserve vice chairman
Michael Barr and other officials in the
Biden Administration had become increasingly concerned about the risk posed to the financial system by the rapidly increasing size of regional banks.
U.S. investigations The collapse of Silicon Valley Bank itself also spurred federal investigations from the U.S. Securities and Exchange Commission as well as the United States Department of Justice. Within the scope of both probes is the sales of stock made by senior officers of Silicon Valley Bank shortly before the bank failed, while the SEC's investigation also includes a review of past financial-related and other risk-related disclosures made by Silicon Valley Bank to evaluate their accuracy and completeness. Internal investigations at the FDIC and Federal Reserve noted that deregulation, not subjecting medium-sized banks to high scrutiny, reduced enforcement of remaining regulations, and government staffing shortages weakened oversight and allowed mismanagement of banks to cause their collapse.
Economic impact As depositors began to move money
en masse from smaller banks to larger banks, stock price stock price stock price stock price stock price stock price price Following SVB and Signature's collapses,
Western Alliance Bancorporation share price fell 47% and
PacWest Bancorp was down 21% recovering after their trading was halted.
Moody's downgraded its outlook on the U.S. banking system to negative, citing what it described as "rapid deterioration" of the sector's financial footing. It also downgraded the
credit ratings of several regional banks, including Western Alliance, First Republic, Intrust Bank,
Comerica,
UMB Financial Corporation, and
Zions Bancorporation. Large declines in regional bank stocks continued after First Republic's failure. U.S. President
Joe Biden made a statement about the first three bank failures on March 13, and asserted that government intervention was not a bailout and that the banking system was stable. The initial bank failures led to speculation on March 13 that the Federal Reserve could pause or halt rate hikes. Beginning on March 13, traders began modifying their strategies in the expectation that fewer hikes than previously expected would occur. Some financial experts suggested that the BTFP, combined with a recent practice of finding buyers who would cover all deposits, may have effectively removed the FDIC's $250,000 deposit insurance limit. However, Treasury Secretary
Janet Yellen clarified that any guarantee beyond that limit would need the approval of the Biden administration and Federal regulators. The initial three bank failures and resulting pressures on other U.S. regional banks were expected to reduce available financing in the
commercial real estate market and further slow commercial property development. The Federal Reserve's
discount window liquidity facility saw around $150 billion in borrowing from various banks by March 16, Since the majority of First Republic's long term assets were in
municipal bonds, it was unable to make full use of the BTFP as those assets did not qualify as an eligible collateral. By March 16, large inter-bank flows of funds were occurring to shore up bank balance sheets and numerous analysts were reporting on a more general U.S.
banking crisis. Many banks had invested their reserves in
U.S. Treasury securities, which had been paying low interest rates. As the Federal Reserve began raising rates in 2022, bond prices declined, decreasing the market value of
bank capital reserves and leading some banks to sell the bonds at steep losses as yields on new bonds were much higher. while
The New York Times said that the March banking crisis was hanging over the economy and had rekindled fear of recession as business borrowing would become more difficult as many regional and community banks would have to reduce lending. Late on Sunday, the Federal Reserve and several other central banks announced significant USD liquidity measures in order to calm market turmoil. In a "coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements", the U.S. Federal Reserve, the
Bank of Canada,
Bank of Japan,
European Central Bank, and
Swiss National Bank joined to organize daily U.S. dollar swap operations. These swaps had previously been set up to occur on a weekly cadence. In May 2023, FDIC proposed imposing higher fees on an estimated 113 of the largest banks to cover the costs of bailing out uninsured depositors.
International impact By 19 March, concerns about the banking sector internationally had increased. That day, Swiss bank
UBS Group AG bought its smaller competitor
Credit Suisse in an
emergency arrangement brokered by the Swiss government. One month before the events in the United States, Credit Suisse had announced its largest annual loss since the
2008 financial crisis, as clients continued withdrawing their cash at a rapid pace; $147 billion had been withdrawn in the fourth quarter of 2022. It also disclosed it had found "material weaknesses" in its financial reporting. Its largest investor,
Saudi National Bank, announced on March 15 that it would not provide more support to Credit Suisse. Its share price plunged 25% on the news and UBS stepped in to buy the bank.
Axel Lehmann, former chairman of the bank, later sought to blame the American bank failures for triggering Credit Suisse's demise, though other analysts disputed that characterization. The bank had experienced many years of multi-billion dollar losses, scandals, executive turnover and weak business strategy. Late on Sunday the Federal Reserve and several other
central banks announced significant USD liquidity measures in order to calm market turmoil. In a "coordinated action to enhance the provision of liquidity through the standing U.S. dollar swap line arrangements", the U.S. Federal Reserve, the
Bank of Canada,
Bank of Japan,
European Central Bank (ECB) and
Swiss National Bank joined to organize daily U.S. dollar swap operations. These swaps had previously been set up to occur on a weekly cadence. On 21 March,
The Business Times reported that Asian central banks were "unlikely to be greatly influenced by the banking crisis in the United States and Europe", but
Australia's central bank governors met and publicly indicated a potential pause in recent rate hikes.
ABC News reported that the challenge for central banks is determining if the "banking turmoil close to crashing the real economy, or is inflation still the greater threat." In Japan the three main lenders,
Mitsubishi UFJ Financial Group,
Sumitomo Mitsui Financial Group and
Mizuho Financial Group, lost share value between 10% and 12% due to the market turmoil and their exposure to the bond market. Japan's
central bank held a crisis meeting in mid-March while the
Topix banks index fell 17%. The fall was led by fears over the SVB collapse and the risks in Japan's regional banking sector, partly because of exposure to US interest rate hikes. The cost to insure against default on
Deutsche Bank debt rose substantially on Friday, 24 March, with the 5-year
CDS for the bank's debt rising 70%. The ECB and other European central banks raised interest rates the same day. The European
STOXX 600 index fell around 4% with shares in Deutsche Bank down more than 14% at one point, closing the day at a loss of around 8%. The UK's banking index also fell around 3% led by falls of around 6% for both
Barclays and
Standard Chartered and a 4% drop for
NatWest. Shares in other European banks also fell, among them
Commerzbank, Austria's
Raiffeisen Bank and the French
Société Générale. According to the European Commission's
Paolo Gentiloni, finance ministers in the Euro zone called on the commission to close loopholes in Crisis Management and Deposit Insurance (CMDI) provision, starting in the second quarter of 2023.
Chinese banks experienced little negative effect. According to
Bloomberg News, almost all of the 166 top performers during the market turmoil were in China. The banking crisis in the U.S. and Europe highlighted the relative stability of the
Chinese banking system. While China's recovery from the pandemic remains fragile, inflation there is muted, and the
People's Bank of China had adjusted interest rates at a slower pace than Western central banks. The turbulence in the financial system caused India's
central bank to put any further hikes in interest rates on hold on 6 April, with governor
Shaktikanta Das saying, "it's a pause not a pivot". A 25 basis point increase had been widely expected. Central banks in Australia, Canada and Indonesia also paused any further increases. While rising interest rates give banks greater returns on customer's loans, the tighter financial conditions meant the sector saw a downturn in equity funding, with the S&P 500 bank index (SPXBK) in April down 14% year to date on expectation of lower quarterly earnings for some US banks. Effects on the secondary market were also expected. On 11 April the
International Monetary Fund downgraded its forecast for GDP growth globally in 2023 from 2.9% to 2.8%, saying "Uncertainty is high and the balance of risks has shifted firmly to the downside so long as the financial sector remains unsettled". The forecast marked a slowdown from 3.4% in 2022, but predicted growth could rise modestly to 3.0% in 2024. The
IMF had been cutting its forecast since spring 2022. ==See also==